Featured in Bloomberg: China’s Bond Market Is Changing Its Tune on Japanification

Central Bank Win

A major factor in the bond rout has been the PBOC’s decision to hold fire on rate cuts since last September, defying expectations that the central bank would be forced to lower rates to boost the economy.

Despite official guidance from Chinese politicians to adopt a “moderately loose” approach, the central bank has paused net buying of government bonds, tolerated tighter bank liquidity and stood pat on both interest rates and reserve requirements.

The job of boosting the economy has instead been left to fiscal policy, with an extra helping hand from Beijing’s newfound support for the private sector. DeepSeek’s AI progress, as well as

success by Alibaba Group Holding Ltd. and other companies, has helped shift sentiment in financial markets.

To be sure, worries about deflation in China are far from over. The country’s most recent consumer price data showed the first deflationary reading for more than a year, partly the result of seasonal effects. Trump’s tariff s will put pressure on the economy, and Chinese leader Xi Jinping’s attempt to engineer a

structural shift in growth drivers will be a tough ask.

China’s yield curve is also flattening, a sign that investors remain worried about the economy.

Low inflation and slower growth will both suppress bond yields, said Edmund Goh

, investment director of Asia fixed income at Aberdeen Investments.

But for now, at least, the comparisons to Japan no longer ring true.

The Bank of Japan used years of ultra-loose monetary policy in an attempt to lift its economy out of a slump, ultimately embarking on one of the world’s boldest experiments with quantitative easing. China’s central bank has gone in the opposite direction — and analysts say if it continues to resist rate cuts, bond yields have further to rise.

“I don’t see any reason to think the 10-year yield couldn’t move above 2%,and it seems more likely that the unwinding of the Japanification trade will continue,” said Adam Wolfe , an emerging markets economist at Absolute Strategy Research.

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